WELLTOWER INC. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations On May 4, 2021, we filed with the Securities and Exchange Commission (the “SEC”) (1) an open-ended automatic or “universal” shelf registration statement on Form S-3 covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units to replace our existing “universal” shelf registration statement filed with the SEC on May 17, 2018, and (2) a registration statement in connection with our enhanced dividend reinve stment plan (“DRIP”) under which we may issue up to 15,000,000 shares of common stock to replace our existing DRIP registration statement on Form S-3 filed with the SEC on May 17, 2018. As of July 23, 2021, 15,000,000 shares of common stock remained available for issuance under the DRIP registration statement. On May 4, 2021, we entered into (i) an equity distribution agreement (the “EDA”) with each of Robert W. Baird & Co. Incorporated, Barclays Capital Inc., BMO Capital Markets Corp., BN Y Mellon Capital Markets, LLC, BofA Securities, Inc., BOK Financial Securities, Inc., Citigroup Global Markets Inc., Comerica Securities, Inc., Credit Agricole Securities (USA) Inc., Deutsche Bank Securities Inc., Fifth Third Securities, Inc., Goldman Sachs & Co. LLC, Jefferies LLC, J.P. Morgan Securities LLC, KeyBanc Capital Markets Inc., Loop Capital Markets LLC, Mizuho Securities USA LLC, Morgan Stanley & Co. LLC, MUFG Securities Americas Inc., Raymond James & Associates, Inc., RBC Capital Markets, LLC, Scotia Capital (USA) Inc., SMBC Nikko Securities America, Inc., Stifel, Nicolaus & Company, Incorporated, TD Securities (USA) LLC, Truist Securities, Inc., UBS Securities LLC and Wells Fargo Securities, LLC relating to the offer and sale from time to time of up to $2,000,000,000 aggregate amount of our common stock and (ii) separate master forward sale confirmations with each of Bank of America, N.A., Bank of Montreal, The Bank of New York Mellon, Barclays Bank PLC, Citibank, N.A., Crédit Agricole Corporate and Investment Bank, Deutsche Bank AG, London Branch, Goldman Sachs & Co. LLC, Jefferies LLC, JPMorgan Chase Bank, National Association, KeyBanc Capital Markets Inc., Mizuho Markets Americas LLC, Morgan Stanley & Co. LLC, MUFG Securities EMEA plc, Raymond James & Associates, Inc., Royal Bank of Canada, The Bank of Nova Scotia, The Toronto-Dominion Bank, Truist Bank, UBS AG, London Branch and Wells Fargo Bank, National Association (together with the EDA, the “ATM Program”), replacing the ATM Program entered into on February 25, 2019. The ATM Program also allows us to enter into forward sale agreements. As of July 23, 2021, we had $1,905,854,000 of remaining capacity unde r the ATM Program, which excludes forward sales agreements outstanding for the sale of 17,295,369 shares or approximately $1,389,830,000 with maturity dates in 2022. We expect to physically settle the forward sales for cash proceeds. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our unsecured revolving credit facility and commercial paper program. In connection with the filing of the new “universal” shelf registration statement, the Company also filed with the SEC two prospectus supplements that will continue offerings that were previously covered by prospectus supplements and the accompanying prospectus to the prior registration statement relating to: (i) the registration and possible issuance of up to 620,731 shares of the Company’s common stock (the “DownREIT Shares”), that may be issued from time to time if, and to the extent that, certain holders of Class A units (the “DownREIT Units”) of HCN G&L DownREIT, LLC, a Delaware limited liability company (the “DownREIT”), tender such DownREIT Units for redemption by the DownREIT, and HCN DownREIT Member, LLC, a majority-owned indirect subsidiary of the Company (including its permitted successors and assigns, the “Managing Member”), or a designated affiliate of the Managing Member, elects to assume the redemption obligations of the DownREIT and to satisfy all or a portion of the redemption consideration by issuing DownREIT Shares to the holders instead of or in addition to paying a cash amount; and (ii) the registration and possible issuance of up to 475,327 shares common stock (the “DownREIT II Shares”), that may be issued from time to time if, and to the extent that, certain holders of Class A units (the “DownREIT II Units,” and collectively with the DownREIT Units, the “Units”) of HCN G&L DownREIT II LLC, a Delaware limited liability company (the “DownREIT II”), tender such DownREIT II Units for redemption by the DownREIT II, and the Managing Member, or a designated affiliate of the Managing Member, elects to assume the redemption obligations of the DownREIT II and to satisfy all or a portion of the redemption consideration by issuing DownREIT II Shares to the holders instead of or in addition to paying a cash amount. Results of Operations Summary Our primary sources of revenue include resident fees and services, rent and interest income. Our primary expenses include property operating expenses, depreciation and amortization, interest expense, general and administrative expenses and other expenses. We evaluate our business and make resource allocations on our three business segments: Seniors Housing Operating, Triple-net and Outpatient Medical. The primary performance measures for our properties are NOI and same store NOI ("SSNOI"), and other supplemental measures include FFO and EBITDA, which are further discussed below. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations (dollars in thousands, except per share amounts): 36 WELLTOWER INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2021 2020 Amount % 2021 2020 Amount % Net income $ 45,757 $ 159,216 $ (113,459) (71) % $ 117,949 $ 488,596 $ (370,647) (76) % NICS 26,257 179,246 (152,989) (85) % 97,803 489,530 (391,727) (80) % FFO 248,840 335,597 (86,757) (26) % 536,007 691,721 (155,714) (23) % EBITDA 406,762 553,177 (146,415) (26) % 850,465 1,304,807 (454,342) (35) % NOI 498,335 527,711 (29,376) (6) % 933,071 1,104,532 (171,461) (16) % SSNOI 391,695 410,232 (18,537) (5) % 778,551 861,613 (83,062) (10) % Per share data (fully diluted): NICS $ 0.06 $ 0.42 $ (0.36) (86) % $ 0.23 $ 1.17 $ (0.95) (81) % FFO $ 0.59 $ 0.80 $ (0.21) (26) % $ 1.28 $ 1.66 $ (0.38) (23) % Interest coverage ratio 3.30 x 4.29 x (0.99) x (23) % 3.43 x 4.88 x (1.45) x (30) % Fixed charge coverage ratio 2.93 x 3.84 x (0.91) x (24) % 3.04 x 4.37 x (1.33) x (30) % Seniors Housing Operating The following is a summary of our SSNOI at Welltower's Share for the Seniors Housing Operating segment (dollars in thousands): QTD Pool YTD Pool Three Months Ended Change Six Months Ended Change June 30, 2021 June 30, 2020 $ % June 30, 2021 June 30, 2020 $ % SSNOI (1) $ 147,557 $ 170,005 $ (22,448) (13.2) % $ 303,978 $ 388,474 $ (84,496) (21.8) % (1) For the QTD and YTD Pools, amounts relate to 528 and 519 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations for the Seniors Housing Operating segment (dollars in thousands): Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2021 2020 $ % 2021 2020 $ % Revenues: Resident fees and services $ 740,891 $ 769,560 $ (28,669) (4) % $ 1,464,355 $ 1,619,532 $ (155,177) (10) % Interest income 856 88 768 873 % 1,975 192 1,783 929 % Other income 802 4,002 (3,200) (80) % 2,621 5,054 (2,433) (48) % Total revenues 742,549 773,650 (31,101) (4) % 1,468,951 1,624,778 (155,827) (10) % Property operating expenses 582,361 595,513 (13,152) (2) % 1,138,329 1,203,384 (65,055) (5) % NOI (1) 160,188 178,137 (17,949) (10) % 330,622 421,394 (90,772) (22) % Other expenses: Depreciation and amortization 131,035 139,163 (8,128) (6) % 263,621 285,937 (22,316) (8) % Interest expense 10,553 14,029 (3,476) (25) % 21,971 30,463 (8,492) (28) % Loss (gain) on extinguishment of debt, net 3,106 (492) 3,598 731 % (1,537) (492) (1,045) (212) % Provision for loan losses (181) — (181) n/a 70 — 70 n/a Impairment of assets 17,713 75,151 (57,438) (76) % 22,317 78,646 (56,329) (72) % Other expenses 3,709 5,251 (1,542) (29) % 7,168 8,240 (1,072) (13) % 165,935 233,102 (67,167) (29) % 313,610 402,794 (89,184) (22) % Income (loss) from continuing operations before income taxes and other items (5,747) (54,965) 49,218 90 % 17,012 18,600 (1,588) (9) % Income (loss) from unconsolidated entities (12,938) (6,787) (6,151) (91) % (7,704) (17,811) 10,107 57 % Gain (loss) on real estate dispositions, net (28) 14,465 (14,493) (100) % 5,167 14,316 (9,149) (64) % Income from continuing operations (18,713) (47,287) 28,574 60 % 14,475 15,105 (630) (4) % Net income (loss) (18,713) (47,287) 28,574 60 % 14,475 15,105 (630) (4) % Less: Net income (loss) attributable to noncontrolling interests 7,469 (26,156) 33,625 129 % 2,545 (28,088) 30,633 109 % Net income (loss) attributable to common stockholders $ (26,182) $ (21,131) $ (5,051) (24) % $ 11,930 $ 43,193 $ (31,263) (72) % (1) See Non-GAAP Financial Measures below. 37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Decreases in resident fees and services and property operating expenses are primarily a result of decreases in occupancy across the portfolio due to the COVID-19 pandemic and property dispositions. Spot occupancy has declined since the beginning of the pandemic, reaching a low of 72.3% on March 12, 2021 before beginning to recover resulting in occupancy of 74.6% as of June 30, 2021. Spot occupancy rates through June 30, 2021 are as follows: December 2020 January 2021 February 2021 March 2021 April 2021 May 2021 June 2021 Spot occupancy (1) 74.7 % 73.3 % 72.5 % 72.6 % 73.2 % 73.6 % 74.6 % Sequential occupancy change (2) (1.4) % (0.8) % 0.1 % 0.5 % 0.5 % 0.9 % (1) Spot occupancy represents approximate month end occupancy at our share for 592 properties in operation as of December 31, 2020, including unconsolidated properties but excluding acquisitions, dispositions and development conversions since this date. (2) Sequential occupancy changes are based on actual spot occupancy and may not recalculate due to rounding. On a month-to-date basis, as of July 23, 2021, Seniors Housing Operating occupancy has increased approximately 40 basis points. Occupancy continued to strengthen in the U.S. and U.K. with gains of approximately 60 basis points and 30 basis points, respectively while occupancy in Canada remained flat over the same period. Property-level operating expenses associated with the COVID-19 pandemic relating to our Seniors Housing Operating portfolio, net of reimbursements including Provider Relief Funds and similar programs in the U.K. and Canada, resulted in a net benefit of approximately $1,535,000 and $22,792,000 during the three and six months ended June 30, 2021, respectively, as compared to a net expense of $40,127,000 and $47,421,000 during the three and six months ended June 30, 2020, respectively. These costs included higher labor expenses, coupled with expenditures related to procurement of personal protective equipment and other supplies, net of any reimbursements. In 2020 applications were made for amounts under Phase 2 and Phase 3 of the Provider Relief Fund related to our Seniors Housing Operating portfolio. During the six months ended June 30, 2021, we received total Provider Relief Funds of approximately $40,976,000, which was recognized as a reduction to COVID-19 costs within property operating expenses. The fluctuations in depreciation and amortization are due to acquisitions, dispositions and transitions. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. During the six months ended June 30, 2021, we recorded impairment charges of $22,317,000 related to two held for use properties in which the carrying values exceeded the estimated fair value. During the six months ended June 30, 2020, we recorded impairment charges of $78,646,000 related to 12 held for sale properties and one held for use property. Transaction costs related to asset acquisitions are capitalized as a component of the purchase price. Changes in the gain on sales of properties are related to the volume and timing of property sales and the sales prices. The fluctuation in other expenses is primarily due to the timing of noncapitalizable transaction costs associated with acquisitions and operator transitions. During the six months ended June 30, 2021, we completed one Seniors Housing Operating construction project representing $58,844,000 or 490,367 per unit. The following is a summary of our Seniors Housing Operating construction projects, excluding expansions, pending as of June 30, 2021 (dollars in thousands): 38 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Location Units Commitment Balance Est. Completion Hendon, UK 102 $ 76,623 $ 60,773 4Q21 Barnet, UK 100 71,515 51,621 4Q21 Beckenham, UK 100 65,026 55,712 4Q21 Georgetown, TX 188 36,215 5,401 2Q22 New Rochelle, NY 72 42,669 8,846 3Q22 Pflugerville, TX 196 39,500 4,944 3Q22 Sachse, TX 188 38,054 5,806 3Q22 Princeton, NJ 80 29,780 21,670 3Q22 Berea, OH 120 14,934 4,221 4Q22 Painesville, OH 119 14,462 3,563 4Q22 Beaver, PA 116 14,184 3,563 4Q22 1,381 $ 442,962 226,120 Toronto, ON Project in planning stage 49,343 Brookline, MA Project in planning stage 26,845 Washington, DC Project in planning stage 26,295 Columbus, OH Project in planning stage 12,162 Raleigh, NC Project in planning stage 3,441 Brookhaven, GA Project in planning stage 7,808 $ 352,014 Interest expense represents secured debt interest expense which fluctuates based on the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The fluctuations in loss (gain) on extinguishment of debt is primarily attributable to the volume of extinguishments and terms of the related secured debt. The following is a summary of our Seniors Housing Operating segment property secured debt principal activity (dollars in thousands): Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Wtd. Avg. Wtd. Avg. Wtd. Avg. Wtd. Avg. Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance $ 1,667,278 2.89 % $ 2,044,926 3.56 % $ 1,706,189 3.05 % $ 2,115,037 3.54 % Debt issued — — % — — % — — % 44,921 2.58 % Debt extinguished (24,660) 3.31 % (290,198) 2.81 % (66,593) 6.01 % (306,238) 2.90 % Principal payments (11,986) 3.06 % (11,603) 3.17 % (24,246) 3.11 % (23,776) 3.18 % Foreign currency 14,658 2.74 % 36,500 3.01 % 29,940 2.77 % (50,319) 3.19 % Ending balance $ 1,645,290 2.83 % $ 1,779,625 2.91 % $ 1,645,290 2.83 % $ 1,779,625 2.91 % Monthly averages $ 1,670,234 2.86 % $ 2,009,523 3.17 % $ 1,679,223 2.94 % $ 2,044,995 3.33 % The majority of our Seniors Housing Operating properties are formed through partnership interests. Income from unconsolidated entities recognized during the six months ended June 30, 2021 includes a gain on sale recognized from the sale of a home health business owned by one of our unconsolidated entities, offset by losses from unconsolidated entities largely attributable to depreciation and amortization of short-lived intangible assets related to certain investments in unconsolidated joint ventures. Net income attributable to noncontrolling interests represents our partners’ share of net income (loss) related to joint ventures. The decrease during the three and six month periods ended June 30, 2020 relates primarily to our partners' share of impairment charges recognized, offset by our partners' share of gains on real estate dispositions. Triple-net The following is a summary of our SSNOI at Welltower's Share for the Triple-net segment (dollars in thousands): QTD Pool YTD Pool Three Months Ended Change Six Months Ended Change June 30, 2021 June 30, 2020 $ % June 30, 2021 June 30, 2020 $ % SSNOI (1) $ 144,369 $ 142,383 $ 1,986 1.4 % $ 283,068 $ 287,755 $ (4,687) (1.6) % (1) For the QTD and YTD Pools, amounts relate to 549 and 549 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations for the Triple-net segment (dollars in thousands): 39 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2021 2020 $ % 2021 2020 $ % Revenues: Rental income $ 204,725 $ 217,492 $ (12,767) (6) % $ 357,188 $ 408,877 $ (51,689) (13) % Interest income 32,861 15,520 17,341 112 % 47,783 30,191 17,592 58 % Other income 1,355 607 748 123 % 2,452 2,280 172 8 % Total revenues 238,941 233,619 5,322 2 % 407,423 441,348 (33,925) (8) % Property operating expenses 12,627 13,563 (936) (7) % 25,468 26,865 (1,397) (5) % NOI (1) 226,314 220,056 6,258 3 % 381,955 414,483 (32,528) (8) % Other expenses: Depreciation and amortization 54,406 58,138 (3,732) (6) % 111,073 115,832 (4,759) (4) % Interest expense 1,704 2,746 (1,042) (38) % 3,586 5,598 (2,012) (36) % Loss (gain) on derivatives and financial instruments, net (359) 1,434 (1,793) (125) % 1,575 9,085 (7,510) (83) % Provision for loan losses 10,019 1,451 8,568 590 % 10,872 8,523 2,349 28 % Impairment of assets 3,768 — 3,768 n/a 22,732 24,332 (1,600) (7) % Other expenses 4,110 3,500 610 17 % 9,093 4,013 5,080 127 % 73,648 67,269 6,379 9 % 158,931 167,383 (8,452) (5) % Income (loss) from continuing operations before income taxes and other items 152,666 152,787 (121) — % 223,024 247,100 (24,076) (10) % Income (loss) from unconsolidated entities 4,877 6,403 (1,526) (24) % 9,784 12,199 (2,415) (20) % Gain (loss) on real estate dispositions, net 42,709 2,148 40,561 n/a 44,751 51,785 (7,034) (14) % Income from continuing operations 200,252 161,338 38,914 24 % 277,559 311,084 (33,525) (11) % Net income 200,252 161,338 38,914 24 % 277,559 311,084 (33,525) (11) % Less: Net income (loss) attributable to noncontrolling interests 11,405 9,103 2,302 25 % 14,805 27,678 (12,873) (47) % Net income attributable to common stockholders $ 188,847 $ 152,235 $ 36,612 24 % $ 262,754 $ 283,406 $ (20,652) (7) % (1) See Non-GAAP Financial Measures below. Continued decreases in rental income are primarily attributable to an increased number of leases on a cash basis of recognition due to substantially all contractual lease payments no longer deemed to be probable. Additionally, we recorded reserves for straight-line rent receivables balances of $49,241,000 and $34,110,000 during the six month periods ended June 30, 2021 and 2020, respectively. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant’s properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. For the three months ended June 30, 2021, we had 15 leases with rental rate increases ranging from 0.98% to 11.31% in our Triple-net portfolio. Our Triple-net operators are experiencing similar impacts on occupancy and operating costs due to the COVID-19 pandemic as described above with respect to our Seniors Housing Operating properties. However, long-term/post-acute facilities are generally experiencing a higher degree of occupancy declines which may impact the ability of our Triple-net operators to make contractual rent payments to us in the future. Many of our Triple-net operators received funds under the CARES Act Paycheck Protection Program. In addition, operators of long-term/post-acute facilities have generally received funds from Phase 1 of the Provider Relief Fund and operators of assisted living facilities have received funds from Phase 2 and Phase 3 of the Provider Relief Fund. During the six months ended June 30, 2021, we collected approximately 95% of rent due from operators under Triple-net lease agreements (primarily seniors housing and post-acute care facilities). No significant rent deferrals or rent concessions have been made. We evaluate leases individually and recognize rent on a cash basis if collectibility of substantially all contractual rent payments is not probable. Depreciation and amortization fluctuates as a result of the acquisitions, dispositions and transitions of triple-net properties. To the extent we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly. During the six months ended June 30, 2021, we recognized a provision for loan losses under the current expected credit losses accounting standard, primarily related to the initial recognition of the £540 million of senior loan financing to affiliates of Safanad as part of the recapitalization of its investment in HC-One Group during the second quarter. The increase in interest income for the three and six month periods ended June 30, 2021 is due to the increased loan receivable balance driven primarily by the £540 million of senior loan financing to affiliates of Safanad. Additionally, during March 2020, we recognized a provision for loan losses of $6,898,000 to fully reserve for a non-real estate loans receivable that was no longer deemed collectible. During the six months ended June 30, 2021, we recorded impairment charges of $22,732,000 related to three held for sale properties and two held for use properties. During the six months ended June 30, 2020, we recorded impairment charges of $24,332,000 related to one held for use property. Changes in the gain on sales of properties are related to the volume and timing of property sales and the sales prices. Transaction costs related to asset acquisitions are capitalized as a component 40 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of purchase price. The fluctuation in other expenses is primarily due to noncapitalizable transaction costs from acquisitions and segment transitions. During the six months ended June 30, 2021, we completed one Triple-net construction project representing $22,990,000 or $280,366 per unit. The following is a summary of Triple-net construction projects, excluding expansions, pending as of June 30, 2021 (dollars in thousands): Location Units/Beds Commitment Balance Est. Completion Redhill, UK 76 $ 21,952 $ 16,710 3Q21 Leicester, UK 60 15,463 7,457 1Q22 London, UK 82 44,546 22,974 2Q22 Wombourne, UK 66 16,567 7,838 2Q22 Rugby, UK 76 21,141 5,545 4Q22 Raleigh, NC 191 154,256 26,300 2Q23 551 $ 273,925 $ 86,824 Loss (gain) on derivatives and financial instruments, net is primarily attributable to the mark-to-market adjustment recorded on our Genesis Healthcare available for sale investment. Interest expense represents secured debt interest expense and related fees. The change in secured debt interest expense is due to the net effect and timing of assumptions, segment transitions, fluctuations in foreign currency rates, extinguishments and principal amortizations. The following is a summary of our Triple-net secured debt principal activity for the periods presented (dollars in thousands): Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Wtd. Avg. Wtd. Avg. Wtd. Avg. Wtd. Avg. Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance $ 123,139 4.91 % $ 289,739 3.55 % $ 123,652 4.91 % $ 306,038 3.60 % Principal payments (1,246) 5.16 % (1,042) 5.16 % (2,467) 5.16 % (2,102) 5.16 % Foreign currency 673 5.43 % 624 4.12 % 1,381 5.43 % (14,615) 2.90 % Ending balance $ 122,566 4.91 % $ 289,321 3.27 % $ 122,566 4.91 % $ 289,321 3.27 % Monthly averages $ 123,570 4.92 % $ 286,599 3.36 % $ 123,348 4.92 % $ 293,300 3.47 % A portion of our Triple-net properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses from partnerships where we are the noncontrolling partner. Net income attributable to noncontrolling interests represents our partners’ share of net income relating to those partnerships where we are the controlling partner. The decrease during the six months ended June 30, 2021, relates primarily to our partner's share of a gain on sale of certain properties in the prior year. Outpatient Medical The following is a summary of our SSNOI at Welltower Share for the Outpatient Medical segment (dollars in thousands): QTD Pool YTD Pool Three Months Ended Change Six Months Ended Change June 30, 2021 June 30, 2020 $ % June 30, 2021 June 30, 2020 $ % SSNOI (1) $ 99,769 $ 97,844 $ 1,925 2.0 % $ 191,505 $ 185,384 $ 6,121 3.3 % (1) For the QTD and YTD Pools, amounts relate to 350 and 333 same store properties, respectively. Please see Non-GAAP Financial Measures for additional information and reconciliations. The following is a summary of our results of operations for the Outpatient Medical segment for the periods presented (dollars in thousands): 41 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2021 2020 $ % 2021 2020 $ % Revenues: Rental income $ 149,998 $ 178,813 $ (28,815) (16) % $ 300,378 $ 377,388 $ (77,010) (20) % Interest income 4,731 461 4,270 926 % 8,269 927 7,342 792 % Other income 4,343 1,557 2,786 179 % 6,648 1,845 4,803 260 % Total revenues 159,072 180,831 (21,759) (12) % 315,295 380,160 (64,865) (17) % Property operating expenses 45,495 51,688 (6,193) (12) % 92,358 112,296 (19,938) (18) % NOI (1) 113,577 129,143 (15,566) (12) % 222,937 267,864 (44,927) (17) % Other expenses: Depreciation and amortization 55,444 68,070 (12,626) (19) % 110,617 138,403 (27,786) (20) % Interest expense 3,907 4,326 (419) (10) % 7,922 9,134 (1,212) (13) % Loss (gain) on extinguishment of debt, net — 741 (741) (100) % — 741 (741) (100) % Provision for loan losses (3,641) (29) (3,612) n/a (3,362) (29) (3,333) n/a Impairment of assets 2,211 — 2,211 n/a 2,211 — 2,211 n/a Other expenses 1,098 6,456 (5,358) (83) % 1,810 7,463 (5,653) (76) % 59,019 79,564 (20,545) (26) % 119,198 155,712 (36,514) (23) % Income (loss) from continuing operations before income taxes and other items 54,558 49,579 4,979 10 % 103,739 112,152 (8,413) (8) % Income (loss) from unconsolidated entities 85 1,716 (1,631) (95) % 2,993 3,252 (259) (8) % Gain (loss) on real estate dispositions, net 1,987 139,250 (137,263) (99) % 53,830 352,586 (298,756) (85) % Income from continuing operations 56,630 190,545 (133,915) (70) % 160,562 467,990 (307,428) (66) % Net income (loss) 56,630 190,545 (133,915) (70) % 160,562 467,990 (307,428) (66) % Less: Net income (loss) attributable to noncontrolling interests 629 (2,977) 3,606 121 % 2,799 (524) 3,323 634 % Net income (loss) attributable to common stockholders $ 56,001 $ 193,522 $ (137,521) (71) % $ 157,763 $ 468,514 $ (310,751) (66) % (1) See Non-GAAP Financial Measures. Rental income has decreased due primarily to significant dispositions that have closed during 2020. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Our leases could renew above or below current rental rates, resulting in an increase or decrease in rental income. For the three months ended June 30, 2021, our consolidated outpatient medical portfolio signed 117,954 square feet of new leases and 286,868 square feet of renewals. The weighted-average term of these leases was seven years, with a rate of $42.42 per square foot and tenant improvement and lease commission costs of $23.02 per square foot. Substantially all of these leases contain an annual fixed or contingent escalation rent structure ranging from 1.0% to 4.0%. We have collected virtually all rent due through the six months ended June 30, 2021, with uncollected amounts primarily attributable to local jurisdictions with COVID-19 related ordinances providing temporary rent relief to tenants. We evaluate leases individually and recognize rent on a cash basis if collectibility of substantially all contractual rent payments is not probable. The increase in interest income for the three and six months ended June 30, 2021 is due primarily to a $178,207,000 first mortgage loan initiated in August 2020 which was subsequently repaid in full in June of 2021. The fluctuation in property operating expenses and depreciation and amortization are primarily attributable to the significant dispositions that occurred in 2020. To the extent that we acquire or dispose of additional properties in the future, these amounts will change accordingly. During the three months ended June 30, 2021, we recognized an impairment charge of $2,211,000 related to one held for sale property. Changes in gains/losses on sales of properties are related to volume of property sales and the sales prices. Transaction costs related to asset acquisitions are capitalized as a component of purchase price. The fluctuation in other expenses is primarily due to noncapitalizable transaction costs recognized during the three months ended June 30, 2020 from acquisitions no longer expected to be consummated. During the six months ended June 30, 2021, we completed one Outpatient Medical construction project representing $ 101,867,000 or $722 per square foot. The following is a summary of the Outpatient Medical construction projects, excluding expansions, pending as of June 30, 2021 (dollars in thousands): 42 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Location Square Feet Commitment Balance Est. Completion Kalamazoo, MI 40,607 $ 14,267 $ 9,709 3Q21 College Station, TX 25,200 9,025 2,189 1Q22 Norman, OK 47,082 21,707 745 3Q22 Tyler, TX 85,214 35,369 3,722 4Q22 198,103 $ 80,368 $ 16,365 Total interest expense represents secured debt interest expense. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. The following is a summary of our outpatient medical secured debt principal activity (dollars in thousands): Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Wtd. Avg. Wtd. Avg. Wtd. Avg. Wtd. Avg. Amount Interest Rate Amount Interest Rate Amount Interest Rate Amount Interest Rate Beginning balance $ 545,755 3.54 % $ 569,974 3.94 % $ 548,229 3.55 % $ 572,267 3.97 % Debt extinguished — — % (8,393) 4.40 % — — % (8,393) 4.40 % Principal payments (2,483) 4.47 % (2,538) 4.61 % (4,957) 4.47 % (4,831) 4.63 % Ending balance $ 543,272 3.52 % $ 559,043 3.59 % $ 543,272 3.52 % $ 559,043 3.59 % Monthly averages $ 544,109 3.53 % $ 566,608 3.75 % $ 545,361 3.54 % $ 568,751 3.85 % A portion of our Outpatient Medical properties were formed through partnerships. Income or loss from unconsolidated entities represents our share of net income or losses from partnerships where we are the noncontrolling partner. Net income attributable to noncontrolling interests represents our partners’ share of net income or loss relating to those partnerships where we are the controlling partner. Non-Segment/Corporate The following is a summary of our results of operations for the Non-Segment/Corporate activities for the periods presented (dollars in thousands): Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2021 2020 $ % 2021 2020 $ % Revenues: Other income $ 430 $ 375 $ 55 15 % $ 1,385 $ 791 $ 594 75 % Total revenue 430 375 55 15 % 1,385 791 594 75 % Property operating expenses 2,174 — 2,174 n/a 3,828 — 3,828 n/a NOI (1) (1,744) 375 (2,119) (565) % (2,443) 791 (3,234) (409) % Expenses: Interest expense 106,177 105,256 921 1 % 212,004 223,169 (11,165) (5) % General and administrative expenses 31,436 34,062 (2,626) (8) % 61,362 69,543 (8,181) (12) % Loss (gain) on extinguishment of debt, net 52,506 — 52,506 n/a 52,506 — 52,506 n/a Other expenses 2,770 4,204 (1,434) (34) % 4,610 5,987 (1,377) (23) % 192,889 143,522 49,367 34 % 330,482 298,699 31,783 11 % Loss from continuing operations before income taxes and other items (194,633) (143,147) (51,486) (36) % (332,925) (297,908) (35,017) (12) % Income tax (expense) benefit 2,221 (2,233) 4,454 199 % (1,722) (7,675) 5,953 78 % Loss from continuing operations (192,412) (145,380) (47,032) (32) % (334,647) (305,583) (29,064) (10) % Net loss attributable to common stockholders $ (192,412) $ (145,380) $ (47,032) (32) % $ (334,647) $ (305,583) $ (29,064) (10) % (1) See Non-GAAP Financial Measures. Property operating expenses represent insurance costs related to our captive insurance company formed as of July 1, 2020 which acts as a direct insurer of property level insurance coverage for our portfolio. The following is a summary of our Non-Segment/Corporate interest expense for the periods presented (dollars in thousands): 43 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended Change Six Months Ended Change June 30, June 30, June 30, June 30, 2021 2020 $ % 2021 2020 $ % Senior unsecured notes $ 99,923 $ 98,141 $ 1,782 2 % $ 200,136 $ 201,675 $ (1,539) (1) % Unsecured credit facility and commercial paper program 1,940 2,816 (876) (31) % 3,120 12,984 (9,864) (76) % Loan expense 4,314 4,299 15 — % 8,748 8,510 238 3 % Totals $ 106,177 $ 105,256 $ 921 1 % $ 212,004 $ 223,169 $ (11,165) (5) % The change in interest expense on senior unsecured notes is due to the net effect of issuances and extinguishments, as well as the movement in foreign exchange rates and related hedge activity. Please refer to Note 11 for additional information. The change in interest expense on our unsecured revolving credit facility and commercial paper program is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes. Please refer to Note 10 for additional information regarding our unsecured revolving credit facility and commercial paper program. The loss on extinguishment recognized during the six months ended June 30, 2021 is due primarily to the early extinguishment of $339,128,000 of our 3.75% senior unsecured notes due March 2023 and $334,624,000 of our 3.95% senior unsecured notes due September 2023. General and administrative expenses as a percentage of consolidated revenues for the three months ended June 30, 2021 and 2020 were 2.76% and 2.87%, respectively. The provision for income taxes primarily relates to state taxes, foreign taxes and taxes based on income generated by entities that are structured as TRSs. The fluctuation in the provision for income taxes is primarily related to a revaluation of deferred taxes due to a change in the U.K. tax rate and an adjustment to a deferred tax liability due to the recognition of an impairment charge. Other Non-GAAP Financial Measures We believe that net income and net income attributable to common stockholders (“NICS”), as defined by U.S. GAAP, are the most appropriate earnings measurements. However, we consider FFO, NOI, SSNOI, EBITDA and Adjusted EBITDA to be useful supplemental measures of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (“NAREIT”) created funds from operations attributable to common stockholders (“FFO”) as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means NICS, computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate and impairment of depreciable assets, plus depreciation and amortization, and after adjustments for unconsolidated entities and noncontrolling interests. Consolidated net operating income (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property operating expenses. Property operating expenses represent costs associated with managing, maintaining and servicing tenants for our properties. These expenses include, but are not limited to, property-related payroll and benefits, property management fees paid to operators, marketing, housekeeping, food service, maintenance, utilities, property taxes and insurance. General and administrative expenses represent costs unrelated to property operations. These expenses include, but are not limited to, payroll and benefits, professional services, office expenses and depreciation of corporate fixed assets. Same store NOI (“SSNOI”) is used to evaluate the operating performance of our properties using a consistent population which controls for changes in the composition of our portfolio. We believe the drivers of property level NOI for both consolidated properties and unconsolidated properties are generally the same and therefore, we evaluate SSNOI based on our ownership interest in each property ("Welltower Share"). To arrive at Welltower's Share, NOI is adjusted by adding our minority ownership share related to unconsolidated properties and by subtracting the minority partners' noncontrolling ownership interests for consolidated properties. We do not control investments in unconsolidated properties and while we consider disclosures at Welltower Share to be useful, they may not accurately depict the legal and economic implications of our joint venture arrangements and should be used with caution. As used herein, same store is generally defined as those revenue-generating properties in the portfolio for the relevant year-over-year reporting periods. Acquisitions and development conversions are included in SSNOI five full quarters or six full quarter after acquisition or being placed into service for the QTD Pool and YTD Pool, respectively. Land parcels, loans and sub-leases, as well as any properties sold or classified as held for sale during the respective periods are excluded from SSNOI. Redeveloped properties (including major refurbishments of a Seniors Housing Operating property where 20% or more of units are simultaneously taken out of commission for 30 days or more or Outpatient Medical properties undergoing a change in intended use) are excluded from SSNOI until five full quarters or six full quarters post completion of the redevelopment for the QTD Pool and YTD Pool, respectively. Properties undergoing operator transitions and/or segment transitions are also excluded from SSNOI until five full quarters or six full quarters post completion of the transition for the QTD Pool and YTD Pool, respectively. In addition, 44 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations properties significantly impacted by force majeure, acts of God, or other extraordinary adverse events are excluded from SSNOI until five full quarters or six full quarters after the properties are placed back into service for the QTD Pool and YTD Pool, respectively. SSNOI excludes non-cash NOI and includes adjustments to present consistent ownership percentages and to translate Canadian properties and U.K. properties using a consistent exchange rate. We believe NOI and SSNOI provide investors relevant and useful information because they measure the operating performance of our properties at the property level on an unleveraged basis. We use NOI and SSNOI to make decisions about resource allocations and to assess the property level performance of our properties. EBITDA is defined as earnings (net income) before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding unconsolidated entities and including adjustments for stock-based compensation expense, provision for loan losses, gains/losses on extinguishment of debt, gains/loss/impairments on properties, gains/losses on derivatives and financial instruments, other expense, additional other income and other impairment charges. We believe that EBITDA and Adjusted EBITDA, along with net income, are important supplemental measures because they provide additional information to assess and evaluate the performance of our operations. We primarily use these measures to determine our interest coverage ratio, which represents EBITDA and Adjusted EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA and Adjusted EBITDA divided by fixed charges. Fixed charges include total interest and secured debt principal amortization. Covenants in our unsecured senior notes and primary credit facility contain financial ratios based on a definition of EBITDA and Adjusted EBITDA that is specific to those agreements. Our leverage ratios are defined as the proportion of net debt to total capitalization and include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt, excluding operating lease liabilities, less cash and cash equivalents and any IRC Section 1031 deposits), total equity and redeemable noncontrolling interests. Undepreciated book capitalization represents book capitalization adjusted for accumulated depreciation and amortization. Market capitalization represents book capitalization adjusted for the fair market value of our common stock. Our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies. The table below reflects the reconciliation of FFO to NICS, the most directly comparable U.S. GAAP measure, for the periods presented. Noncontrolling interest and unconsolidated entity amounts represent adjustments to reflect our share of depreciation and amortization, gains/loss on real estate dispositions and impairment of assets. Amounts are in thousands except for per share data. Three Months Ended June 30, March 31, December 31, September 30, June 30, March 31, FFO Reconciliation: 2021 2021 2020 2020 2020 2020 Net income attributable to common stockholders $ 26,257 $ 71,546 $ 163,729 $ 325,585 $ 179,246 $ 310,284 Depreciation and amortization 240,885 244,426 242,733 255,532 265,371 274,801 Impairment of assets 23,692 23,568 9,317 23,313 75,151 27,827 Loss (gain) on real estate dispositions, net (44,668) (59,080) (185,464) (484,304) (155,863) (262,824) Noncontrolling interests (16,591) (12,516) (20,579) 48,559 (42,539) (9,409) Unconsolidated entities 19,265 19,223 16,091 16,329 14,231 15,445 FFO $ 248,840 $ 287,167 $ 225,827 $ 185,014 $ 335,597 $ 356,124 Average diluted shares outstanding 419,305 419,079 418,753 418,987 419,121 412,420 Per diluted share data: Net income attributable to common stockholders (1) $ 0.06 $ 0.17 $ 0.39 $ 0.77 $ 0.42 $ 0.75 FFO $ 0.59 $ 0.69 $ 0.54 $ 0.44 $ 0.80 $ 0.86 (1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders. 45 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Six Months Ended June 30, June 30, FFO Reconciliations: 2021 2020 Net income attributable to common stockholders $ 97,803 $ 489,530 Depreciation and amortization 485,311 540,172 Impairment of assets 47,260 102,978 Loss (gain) on real estate dispositions, net (103,748) (418,687) Noncontrolling interests (29,107) (51,948) Unconsolidated entities 38,488 29,676 FFO $ 536,007 $ 691,721 Average diluted common shares outstanding: 419,205 415,775 Per diluted share data: Net income attributable to common stockholders (1) $ 0.23 $ 1.17 FFO $ 1.28 $ 1.66 (1) Includes adjustment to the numerator for income (loss) attributable to OP unitholders. Three Months Ended June 30, March 31, December 31, September 30, June 30, March 31, NOI Reconciliations: 2021 2021 2020 2020 2020 2020 Net income (loss) $ 45,757 $ 72,192 $ 155,278 $ 394,978 $ 159,216 $ 329,380 Loss (gain) on real estate dispositions, net (44,668) (59,080) (185,464) (484,304) (155,863) (262,824) Loss (income) from unconsolidated entities 7,976 (13,049) (258) 5,981 (1,332) 3,692 Income tax expense (benefit) (2,221) 3,943 290 2,003 2,233 5,442 Other expenses 11,687 10,994 33,088 11,544 19,411 6,292 Impairment of assets 23,692 23,568 9,317 23,313 75,151 27,827 Provision for loan losses 6,197 1,383 83,085 2,857 1,422 7,072 Loss (gain) on extinguishment of debt, net 55,612 (4,643) 13,796 33,004 249 — Loss (gain) on derivatives and financial instruments, net (359) 1,934 569 1,395 1,434 7,651 General and administrative expenses 31,436 29,926 27,848 31,003 34,062 35,481 Depreciation and amortization 240,885 244,426 242,733 255,532 265,371 274,801 Interest expense 122,341 123,142 121,173 124,851 126,357 142,007 Consolidated net operating income (NOI) $ 498,335 $ 434,736 $ 501,455 $ 402,157 $ 527,711 $ 576,821 NOI by segment: Seniors Housing Operating $ 160,188 $ 170,434 $ 159,797 $ 174,361 $ 178,137 $ 243,257 Triple-net 226,314 155,641 225,277 108,361 220,056 194,427 Outpatient Medical 113,577 109,360 117,231 119,976 129,143 138,721 Non-segment/corporate (1,744) (699) (850) (541) 375 416 Total NOI $ 498,335 $ 434,736 $ 501,455 $ 402,157 $ 527,711 $ 576,821 46 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Six Months Ended June 30, 2021 June 30, 2020 NOI Reconciliations: Net income (loss) $ 117,949 $ 488,596 Loss (gain) on real estate dispositions, net (103,748) (418,687) Loss (income) from unconsolidated entities (5,073) 2,360 Income tax expense (benefit) 1,722 7,675 Other expenses 22,681 25,703 Impairment of assets 47,260 102,978 Provision for loan losses 7,580 8,494 Loss (gain) on extinguishment of debt, net 50,969 249 Loss (gain) on derivatives and financial instruments, net 1,575 9,085 General and administrative expenses 61,362 69,543 Depreciation and amortization 485,311 540,172 Interest expense 245,483 268,364 Consolidated net operating income (NOI) $ 933,071 $ 1,104,532 NOI by segment: Seniors Housing Operating $ 330,622 $ 421,394 Triple-net 381,955 414,483 Outpatient Medical 222,937 267,864 Non-segment/corporate (2,443) 791 Total NOI $ 933,071 $ 1,104,532 QTD Pool YTD Pool SSNOI Property Reconciliations: Seniors Housing Operating Triple-net Outpatient Medical Total Seniors Housing Operating Triple-net Outpatient Medical Total Consolidated properties 581 643 292 1,516 581 643 292 1,516 Unconsolidated properties 91 39 79 209 91 39 79 209 Total properties 672 682 371 1,725 672 682 371 1,725 Recent acquisitions/development conversions (1) (56) (29) (7) (92) (64) (29) (24) (117) Under development (30) (5) (4) (39) (30) (5) (4) (39) Under redevelopment (2) (10) (1) (2) (13) (11) (1) (2) (14) Current held for sale (8) (54) (2) (64) (8) (54) (2) (64) Land parcels, loans and subleases (11) (19) (6) (36) (11) (19) (6) (36) Transitions (3) (27) (23) — (50) (27) (23) — (50) Other (4) (2) (2) — (4) (2) (2) — (4) Same store properties 528 549 350 1,427 519 549 333 1,401 (1) Acquisitions and development conversions will enter the QTD Pool and YTD Pool after five full quarters and six full quarters after acquisition or certificate of occupancy, respectively. (2) Redevelopment properties will enter the QTD Pool and YTD Pool after five full quarters and six full quarters of operations post redevelopment completion, respectively. (3) Transitioned properties will enter the QTD Pool and YTD Pool after five full quarters and six full quarters of operations with the new operator in place or under the new structure, respectively. (4) Represents properties that are either closed or being closed. 47 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations QTD Pool YTD Pool Three Months Ended Six Months Ended SSNOI Reconciliations: June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Seniors Housing Operating: Consolidated NOI $ 160,188 $ 178,137 $ 330,622 $ 421,394 NOI attributable to unconsolidated investments 11,305 13,277 23,209 28,231 NOI attributable to noncontrolling interests (27,742) (11,870) (35,787) (30,623) NOI attributable to non-same store properties (7,405) (12,476) (24,548) (36,352) Non-cash NOI attributable to same store properties 12,338 (957) 11,516 (1,835) Currency and ownership adjustments (1) (1,127) 3,894 (1,034) 7,659 SSNOI at Welltower Share 147,557 170,005 303,978 388,474 Triple-net: Consolidated NOI 226,314 220,056 381,955 414,483 NOI attributable to unconsolidated investments 4,887 5,133 9,775 10,266 NOI attributable to noncontrolling interests (14,051) (14,613) (22,040) (29,395) NOI attributable to non-same store properties (64,857) (58,367) (115,541) (87,080) Non-cash NOI attributable to same store properties (7,611) (11,829) 29,443 (23,568) Currency and ownership adjustments (1) (313) 2,003 (524) 3,049 SSNOI at Welltower Share 144,369 142,383 283,068 287,755 Outpatient Medical: Consolidated NOI 113,577 129,143 222,937 267,864 NOI attributable to unconsolidated investments 4,988 2,461 9,712 3,524 NOI attributable to noncontrolling interests (4,235) (3,764) (7,977) (8,366) NOI attributable to non-same store properties (11,961) (15,841) (27,793) (43,412) Non-cash NOI attributable to same store properties (2,533) (3,486) (4,156) (6,336) Currency and ownership adjustments (1) (67) (10,669) (1,218) (27,890) SSNOI at Welltower Share 99,769 97,844 191,505 185,384 SSNOI at Welltower Share: Seniors Housing Operating 147,557 170,005 303,978 388,474 Triple-net 144,369 142,383 283,068 287,755 Outpatient Medical 99,769 97,844 191,505 185,384 Total $ 391,695 $ 410,232 $ 778,551 $ 861,613 (1) Includes adjustments to reflect consistent property ownership percentages, to translate Canadian properties at a USD/CAD rate of 1.2658 and to translate U.K. properties at a GBP/USD rate of 1.38. The tables below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands. 48 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended June 30, March 31, December 31, September 30, June 30, March 31, EBITDA Reconciliations: 2021 2021 2020 2020 2020 2020 Net income (loss) $ 45,757 $ 72,192 $ 155,278 $ 394,978 $ 159,216 $ 329,380 Interest expense 122,341 123,142 121,173 124,851 126,357 142,007 Income tax expense (benefit) (2,221) 3,943 290 2,003 2,233 5,442 Depreciation and amortization 240,885 244,426 242,733 255,532 265,371 274,801 EBITDA $ 406,762 $ 443,703 $ 519,474 $ 777,364 $ 553,177 $ 751,630 Interest Coverage Ratio: Interest expense $ 122,341 $ 123,142 $ 121,173 $ 124,851 $ 126,357 $ 142,007 Non-cash interest expense (3,972) (2,991) (1,739) (3,973) (1,914) (8,125) Capitalized interest 4,862 4,496 4,238 3,947 4,541 4,746 Total interest 123,231 124,647 123,672 124,825 128,984 138,628 EBITDA $ 406,762 $ 443,703 $ 519,474 $ 777,364 $ 553,177 $ 751,630 Interest coverage ratio 3.30 x 3.56 x 4.20 x 6.23 x 4.29 x 5.42 x Fixed Charge Coverage Ratio: Total interest $ 123,231 $ 124,647 $ 123,672 $ 124,825 $ 128,984 $ 138,628 Secured debt principal payments 15,715 15,955 16,122 15,876 15,183 15,526 Total fixed charges 138,946 140,602 139,794 140,701 144,167 154,154 EBITDA $ 406,762 $ 443,703 $ 519,474 $ 777,364 $ 553,177 $ 751,630 Fixed charge coverage ratio 2.93 x 3.16 x 3.72 x 5.52 x 3.84 x 4.88 x Six Months Ended June 30, June 30, EBITDA Reconciliations: 2021 2020 Net income (loss) $ 117,949 $ 488,596 Interest expense 245,483 268,364 Income tax expense (benefit) 1,722 7,675 Depreciation and amortization 485,311 540,172 EBITDA $ 850,465 $ 1,304,807 Interest Coverage Ratio: Interest expense $ 245,483 $ 268,364 Non-cash interest expense (6,963) (10,039) Capitalized interest 9,358 9,287 Total interest 247,878 267,612 EBITDA $ 850,465 $ 1,304,807 Interest coverage ratio 3.43 x 4.88 x Fixed Charge Coverage Ratio: Total interest $ 247,878 $ 267,612 Secured debt principal payments 31,670 30,709 Total fixed charges 279,548 298,321 EBITDA $ 850,465 $ 1,304,807 Fixed charge coverage ratio 3.04 x 4.37 x 49 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The table below reflects the reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Dollars are in thousands. Twelve Months Ended June 30, March 31, December 31, September 30, June 30, March 31, Adjusted EBITDA Reconciliations: 2021 2021 2020 2020 2020 2020 Net income $ 668,205 $ 781,664 $ 1,038,852 $ 1,123,710 $ 1,376,664 $ 1,367,488 Interest expense 491,507 495,523 514,388 524,863 537,355 552,334 Income tax expense (benefit) 4,015 8,469 9,968 4,846 6,811 6,177 Depreciation and amortization 983,576 1,008,062 1,038,437 1,058,348 1,075,261 1,057,942 EBITDA 2,147,303 2,293,718 2,601,645 2,711,767 2,996,091 2,983,941 Loss (income) from unconsolidated entities 650 (8,658) 8,083 (49,079) (58,322) (47,941) Stock-based compensation expense (1) 24,278 26,811 28,318 25,485 24,229 24,601 Loss (gain) on extinguishment of debt, net 97,769 42,406 47,049 35,865 68,685 68,436 Loss (gain) on real estate dispositions, net (773,516) (884,711) (1,088,455) (915,055) (1,001,001) (843,456) Impairment of assets 79,890 131,349 135,608 126,389 121,172 55,960 Provision for loan losses 93,522 88,747 94,436 11,351 8,494 7,072 Loss (gain) on derivatives and financial instruments, net 3,539 5,332 11,049 5,411 5,260 5,739 Other expenses (1) 60,985 68,939 64,171 52,630 46,971 48,327 Other impairment (2) 161,639 163,481 146,508 146,508 34,110 32,268 Adjusted EBITDA $ 1,896,059 $ 1,927,414 $ 2,048,412 $ 2,151,272 $ 2,245,689 $ 2,334,947 Adjusted Interest Coverage Ratio: Interest expense $ 491,507 $ 495,523 $ 514,388 $ 524,863 $ 537,355 $ 552,334 Capitalized interest 17,543 17,222 17,472 18,102 18,303 17,691 Non-cash interest expense (12,675) (10,617) (15,751) (14,746) (12,761) (11,599) Total interest 496,375 502,128 516,109 528,219 542,897 558,426 Adjusted EBITDA $ 1,896,059 $ 1,927,414 $ 2,048,412 $ 2,151,272 $ 2,245,689 $ 2,334,947 Adjusted interest coverage ratio 3.82 x 3.84 x 3.97 x 4.07 x 4.14 x 4.18 x Adjusted Fixed Charge Coverage Ratio: Total interest $ 496,375 $ 502,128 $ 516,109 $ 528,219 $ 542,897 $ 558,426 Secured debt principal payments 63,668 63,136 62,707 60,562 57,807 56,308 Total fixed charges 560,043 565,264 578,816 588,781 600,704 614,734 Adjusted EBITDA $ 1,896,059 $ 1,927,414 $ 2,048,412 $ 2,151,272 $ 2,245,689 $ 2,334,947 Adjusted fixed charge coverage ratio 3.39 x 3.41 x 3.54 x 3.65 x 3.74 x 3.80 x (1) Certain severance-related costs are included in stock-based compensation and excluded from other expenses. (2) Represents reserve for straight-line rent receivable balances relating to leases placed on cash recognition. Our leverage ratios include book capitalization, undepreciated book capitalization and market capitalization. Book capitalization represents the sum of net debt (defined as total long-term debt less cash and cash equivalents and any IRC Section 1031 deposits), total equity and redeemable noncontrolling interests. Undepreciated book capitalization represents book capitalization adjusted for accumulated depreciation and amortization. Market capitalization represents book capitalization adjusted for the fair market value of our common stock. Our leverage ratios are defined as the proportion of net debt to total capitalization. The table below reflects the reconciliation of our leverage ratios to our balance sheets for the periods presented. Amounts are in thousands, except share price. 50 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As of June 30, March 31, December 31, September 30, June 30, March 31, 2021 2021 2020 2020 2020 2020 Book capitalization: Unsecured credit facility and commercial paper $ — $ — $ — $ — $ — $ 844,985 Long-term debt obligations (1) 13,572,816 14,618,713 13,905,822 13,889,030 14,543,485 13,228,433 Cash and cash equivalents (2) (763,921) (2,513,156) (1,968,765) (2,096,571) (1,766,819) (303,423) Total net debt 12,808,895 12,105,557 11,937,057 11,792,459 12,776,666 13,769,995 Total equity and noncontrolling interests (3) 17,243,208 17,046,932 17,225,062 17,291,155 17,263,672 17,495,696 Book capitalization $ 30,052,103 $ 29,152,489 $ 29,162,119 $ 29,083,614 $ 30,040,338 $ 31,265,691 Net debt to book capitalization ratio 43 % 42 % 41 % 41 % 43 % 44 % Undepreciated book capitalization: Total net debt $ 12,808,895 $ 12,105,557 $ 11,937,057 $ 11,792,459 $ 12,776,666 $ 13,769,995 Accumulated depreciation and amortization 6,415,676 6,212,432 6,104,297 6,002,775 6,001,177 5,910,979 Total equity and noncontrolling interests (3) 17,243,208 17,046,932 17,225,062 17,291,155 17,263,672 17,495,696 Undepreciated book capitalization $ 36,467,779 $ 35,364,921 $ 35,266,416 $ 35,086,389 $ 36,041,515 $ 37,176,670 Net debt to undepreciated book capitalization ratio 35 % 34 % 34 % 34 % 35 % 37 % Market capitalization: Common shares outstanding 422,562 417,520 417,401 417,305 417,302 417,391 Period end share price $ 83.10 $ 71.63 $ 64.62 $ 55.09 $ 51.75 $ 45.78 Common equity market capitalization $ 35,114,902 $ 29,906,958 $ 26,972,453 $ 22,989,332 $ 21,595,379 $ 19,108,160 Total net debt 12,808,895 12,105,557 11,937,057 11,792,459 12,776,666 13,769,995 Noncontrolling interests (3) 1,322,762 1,248,054 1,252,343 1,183,281 1,215,532 1,362,913 Market capitalization $ 49,246,559 $ 43,260,569 $ 40,161,853 $ 35,965,072 $ 35,587,577 $ 34,241,068 Net debt to market capitalization ratio 26 % 28 % 30 % 33 % 36 % 40 % (1) Amounts include senior unsecured notes, secured debt and lease liabilities related to financing leases, as reflected on our Consolidated Balance Sheets. Operating lease liabilities related to the ASC 842 adoption are excluded. (2) Inclusive of IRC Section 1031 deposits, if any. (3) Includes amounts attributable to both redeemable noncontrolling interests and noncontrolling interests as reflected on our Consolidated Balance Sheets. Critical Accounting Policies Our unaudited consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions. Management considers an accounting estimate or assumption critical if: • the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and • the impact of the estimates and assumptions on financial condition or operating performance is material. Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors. Management believes the current assumptions and other considerations used to estimate amounts reflected in our unaudited consolidated financial statements are appropriate and are not reasonably likely to change in the future. However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our unaudited consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition. Please refer to Note 2 to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2021. 51 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q may contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. When Welltower uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “pro forma,” “estimate” or similar expressions that do not relate solely to historical matters, Welltower is making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties that may cause Welltower’s actual results to differ materially from Welltower’s expectations discussed in the forward-looking statements. This may be a result of various factors, including, but not limited to: the duration and scope of the COVID-19 pandemic; uncertainty regarding the implementation and impact of the CARES Act and future stimulus or other COVID-19 relief legislation; the impact of the COVID-19 pandemic on occupancy rates and on the operations of Welltower and its operators/tenants; actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting Welltower’s properties and the operations of Welltower and its operators/tenants; the effects of health and safety measures adopted by Welltower and its operators/tenants related to the COVID-19 pandemic; increased operational costs as a result of health and safety measures related to COVID-19; the impact of the COVID-19 pandemic on the business and financial condition of operators/tenants and their ability to make payments to Welltower; disruptions to Welltower's property acquisition and disposition activity due to economic uncertainty caused by COVID-19; general economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth; the status of capital markets, including availability and cost of capital; uncertainty from the expected discontinuance of LIBOR and the transition to any other interest rate benchmark; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies, responding to government investigations and punitive settlements and operators’/tenants’ difficulty in cost effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and seniors housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; Welltower’s ability to transition or sell properties with profitable results; the failure to make new investments or acquisitions as and when anticipated; natural disasters and other acts of God affecting Welltower’s properties; Welltower’s ability to re-lease space at similar rates as vacancies occur; Welltower’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future investments or acquisitions; environmental laws affecting Welltower’s properties; changes in rules or practices governing Welltower’s financial reporting; the movement of U.S. and foreign currency exchange rates; Welltower’s ability to maintain Welltower’s qualification as a REIT; key management personnel recruitment and retention; and other risks described in Welltower’s reports filed from time to time with the SEC. Other important factors are identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise, or to update the reasons why actual results could differ from those projected in any forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We seek to mitigate the underlying foreign currency exposures with gains and losses on derivative contracts hedging these exposures. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates and foreign currency exchange rates. We historically borrow on our unsecured revolving credit facility and commercial paper program to acquire, construct or make loans relating to health care and seniors housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under our unsecured revolving credit facility and commercial paper program. We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited. 52